Week 2: Discovering Where You Are

Course Progress:

“The quickest way to double your money is
to fold it in half and put it in your back pocket.” ― attributed to Will Rogers

You’re lost in a megamall.

You find a big map that says, “You are here,” but you have no clue where here actually is. You have to stop and look around you for points of reference before here can be used to navigate to there, wherever there might be for you.

This week, we’re going to find out exactly where you are; not in the metaphorical mall, but in your financial life.

By this point, you’ve given some serious thought to what you want the rest of your life to look like: your destination. But before you can get there, you’ll need to know where you are financially right now.

Fact is, we should all know pretty much where we stand financially all the time. But many of us don’t. Why? Maybe because we’re uncomfortable looking around. We don’t want to assess our finances because we’re scared of what we might find — or more accurately, not find.

Like last week, what we really need to talk about isn’t the math. We’ll get there. (And we’ll be writing down some numbers here, but don’t get intimidated; we’ll ease into it.)

This week we’re going to overcome the fear of recognizing exactly where we are.

Having your financial history at your fingertips is an important part of feeling in control of your finances.

Last week we discussed the insecurity underlying self-destructive behavior. Well, the same insecurity that keeps you from looking in mirrors can make you shy away from reflecting on your finances.

When you stop flying blind, much of your money anxiety falls away and everything else becomes easier. Reality is often less scary than what we can imagine.

When we know where we are, we can deal. We can understand our situation and get help.

No question: The earlier in life you focus on your finances, the better off you’ll be. But even if you aren’t in your 20s, no worries. You can still set and reach realistic retirement goals.

To discover where you are now, you must answer these four questions.

How much debt do I have?

What’s the total of all my assets?

Do I have a spending plan that’s working for me?

Do I know where all my important records are?

If you have a good answer to all these questions, you’re ahead of the game. But since many people don’t, let’s start by catching up.

Figuring your net worth

“Net worth” is a phrase you often see thrown around for celebrities and rich folks; you’re likely neither. But it’s important for everyone. It offers a snapshot of your financial picture.

It’s not a hard number to figure out. It’s your assets (everything you own) minus your debts (everything you owe).

If you were to ask me what my net worth is, I could tell you instantly, because I’ve been keeping a net worth spreadsheet on my computer for years. I update it on the last day of every month.

It’s time for you to start doing the same. Here’s how to go about it.

What you own

The first thing that goes on your spreadsheet is your assets: everything you own. You’ll list bank accounts, real estate, investments and other forms of wealth.

What I do is divide my assets into two categories. The first is my liquid assets, which is either cash or things easily convertible into cash. The second category is everything else that has resale value but can’t be quickly converted to cash, which, for example, would be cars, a house, jewelry or investment real estate.

Here’s what it looks like:

Liquid Assets

Asset

Amount

Vanguard stock account

$50,000

Wells Fargo savings

$50,000

Wells Fargo checking

$5,000

HSA account

$20,000

401(k) accounts

$300,000

Wife's 401(k) accounts

$75,000

IRA account

$100,000

Total Liquid Assets

$600,000

Other Assets

Asset

Amount

Boat, cars and Harley

$75,000

Investment land

$25,000

Home

$300,000

Total Other Assets

$400,000

Total Assets

Total Assets

$1,000,000

You’ll note I don’t list every single thing I own. For example, I didn’t list my furniture, lawn mower, computer or kitchenware. Why? They’re not worth much, and this isn’t a loan application; it’s simply to provide a quick down-and-dirty view of what I’m generally worth.

I keep it simple so I keep it going.

When it comes to estimating the value of things like houses and cars, I put down an educated guess. If you want to get a bit more precise, you can use sites like Zillow to get a rough estimate of your home’s value and Kelley Blue Book to see what your car is worth.

What you owe

So far, things look pretty sweet. But I still have to list my liabilities — what I owe — which will reduce my net worth. Here’s what that looks like:

While the numbers above are fictional, the fact that I track my net worth monthly isn’t. I’ve been doing it for years, and you should too.

While it’s important to know what your net worth is, what’s much more important is to follow what’s happening to your net worth from month to month and year to year.

Remember: Where you picture yourself is ultimately where you’ll end up.

My spreadsheet has a column for each month. So, every month after I’ve computed my net worth, the first thing I do is see if I’m richer or poorer than the month before. If I’m richer, I’m getting closer to my financial goals. If I’m poorer, they’re getting further away, which means I need to stop and try to figure out what happened.

This simple exercise, or one very similar, is performed regularly by nearly every business. But very few individuals do it. That may explain why so many businesses are successful and so many individuals aren’t.

Tip

Want to make computing your net worth super fast? In your spreadsheet, link the title of each account to the URL of that account online.

For example, make the words “Vanguard stock account” on your spreadsheet a link to your online Vanguard account, and the words “American Express” a link to your American Express account, etc.

Then you can just click each account title, fill in the blank and you’re done in a couple of minutes. (Note: When you do this, be sure to keep your net worth spreadsheet secure so others can’t access your accounts.)

What other data should you store?

You’ll need other pieces of personal financial information organized for quick access. For example, can you immediately put your hands on the following documents?

Year-end statements for IRAs, 401(k) plans and any other retirement plans

Social Security statements

Statement of earned benefits for pension plans

Life insurance policies

Car insurance policies

Home insurance policies

Health insurance cards and information

Contact information for all of your health care providers

Records relating to ongoing health conditions

A list of prescription drugs you take

A copy of your will and/or trust

A copy of car, boat, motorcycle titles

A copy of your home’s deed

A copy of your passport

A copy of your driver’s license

If you can’t immediately fetch these and other important documents, do what I do: Find them, make digital copies and store the copies in the cloud.

Because I’ve scanned and stored copies, there’s not a single thing in the list above that I can’t find in less than a minute.

Tip

Digitizing and storing important documents is helpful for situations like the one you’re in now, since we will need some of these documents during this course. It’s also super important if your house burns down, you become incapacitated or disaster strikes and you or someone you love needs your financial data.

Finding Social Security and pension data

Social Security will be an important part of this course, and we’re going to devote a whole week to it. If you haven’t already, now’s a good time to get your personalized Social Security statement. It’s a useful thing to have because it estimates your future benefits at full retirement age based on your past and estimated future contributions.

Benefits statements no longer come in the mail. But it’s easy to create your online Social Security account and get a digital copy. It only takes a couple of minutes. The first thing you’ll see when you log in is your earnings record and a link to your statement, which you can download.

Since Social Security is paid based on your 35 highest earning years, and the federal government makes no assumptions about your income going up over time, you can probably project your benefits a little better than they can. (More on this later.)

Pulling it all together

If you’ve been doing everything I’ve talked about as we went along, you should be feeling more on top of things than you have in a long time. If you haven’t, you’re about to start.

Now is the time to establish whatever folder or organizing scheme works for you and stick to it, so you never lose track of any of these documents again. Having your financial history at your fingertips is an important part of feeling in control of your finances.

If you still receive hard copies of everything — which is getting tougher to do these days, even if you want to — it’s good to keep digital copies, too, and links to the relevant websites, similarly organized and in a safe place.

You may also want to start saving Money Talks News articles and other retirement information for future reference. Planning for retirement is an ongoing process, so save anything that interests you. Remember your happiness list! Make a digital folder and start filling it with advice, thoughts, places you might want to live in retirement and things you want to try.

Make it real. Remember: Where you picture yourself is ultimately where you’ll end up.

Your task for this week

I’ve prepared a Google spreadsheet personal net worth statement that’s ready for you to use. Spend some time familiarizing yourself with it, add or change any things you need to keep track of, and most importantly: Start using it regularly.

If you downloaded the .zip file of all the exercises I shared at the start of the course, you already have it on your computer! If not, here you go.